Weak Guidance From JDSU, but Balance Sheet Notably Improves

JDS Uniphase (JDSU) remains on my buylist and I think the stock is becoming an even more compelling value. I've included a note from MKM as I feel it does a sound job of highlighting the tepid conditions for JDSU. Mainly, JDSU does not see a typical Q4 budget flush this year, which has been echoed ahead of this quarter and by several other vendors.

The key here is the soundness of the JDSU enterprise and as noted by MKM, the company is still solidly profitable and generating free cash flow at much lower levels of revenue. Thus, when the business conditions improve there is better leverage in the model for higher earnings and cash flow. On the call, the company highlighted it's $43mm in cash from operations as well as pointing out the $730mm in cash and investments after retiring 50mm in convertible debt. This leaves $211mm in debt due. Thus, the company is sporting a net cash balance over $500mm and this is set to grow even at the current low run rate. I project that JDSU can easily generate $70-100mm per quarter on a 7-10% higher revenue base.

The rub is the timing of the improvement of carrier capex. I continue to think we are seeing the effect of massive product introductions and the culmination of a huge spend on upgrading wireless infrastructure. This will reach a tipping point and we should see a switch to wireline capex in 1-3 quarters depending on the carrier. For Verizon (VZ), I could see wireline starting to improve most quickly and possibly by Q1. AT&T (T) is likely in the 2-3 quarters away from that same tipping point. While, the EU carriers timing is somewhat more difficult to call given the wide ranging issues in that part of the world.

Bottom line, JDSU remains a name awaiting that positive catalyst as the turn in capex will likely result in at least a cyclical turn that will last more than 3 quarters and could last as long as 5-6 quarters. At the same time, they have improved balance sheet conditions as much as any stock in the space, while also improving future operating leverage. Thus I'm looking at some names in the portfolio to swap into this position in the coming days/weeks.